Local government viability, local government taxation : local government viability : an analysis of municipal tax sources in South Africa and the application of international trends to broaden the tax base

Abstract

Local government finance in South Africa is experiencing extreme financial pressure due to the expectations of both politicians and the voter core. The politicians who, in their election campaigns, promised the voters better infrastructure mainly created these expectations. Central and Provincial government added to this pressure with the devolution of functions to local government level. The financial resources transferred by central and provincial government to local government for these additional functions, however, have not kept pace with the responsibilities. This is leaving a shortfall that must be financed by local government from their own resources. The pressure to improve and provide new infrastructure and services far exceeds the availability of funds. Local government has three alternatives to provide the needed funding. First it can increase its rates and taxes to a level where revenue and expenditure come to equilibrium. The problem with this alternative is affordability. Taxes can only be raised to a certain level before formal resistance from ratepayers will result in refusals to pay or they would geographically move to an area where taxes are more affordable. Second, local government can investigate and implement alternative revenue resources. A number of such alternative sources were found during this study of international trends. One example is indirect tax, which is raised at one point and then devolved downward to the end user of the goods or service. The advantage is that both the owners of property as well as all other inhabitants of the area carry the tax burden. At the same time, local government must ensure that the base (property values) on which these taxes are calculated stay current in relation to market trends. This can be achieved by ensuring that revaluations take place on a yearly basis for all properties. There are various methods, such as the relative sales approach, that local government can use in this process to counter the prohibitive costs of a yearly zero based evaluation. Current legislation in South Africa is over prescriptive and amendments are needed to ensure local authorities maintain their autonomy and discretion over their own affairs. One example of such prescriptiveness is the exemption of the first R 15,000 of the valuation of residential property value. This section in the Act is certainly regressive as far as small local authorities are concerned. Valuations in small local authorities, as a norm, are much lower than that of their larger counterparts. The result is that they, the small local authorities, lose a larger proportion of their tax revenue due to this exemption. Legislation needs to be amended to allow for a percentage of valuation as exemption. This will ensure that both large and small local authorities carry a relatively equal loss in revenue. The study proposes a number of amendments to legislation currently in place and through the financial model show the effect of such amendments on property tax revenue. The model further strengthens the findings that legislation amendments are needed to ensure the long-term viability of local government in South Africa. Third, local government cannot only rely on additional revenue resources to resolve the dilemma. Budget prioritisation and control is of great importance. Alternative methods and procedures for budget preparation must be developed and implemented. Sufficient information must be given to Council to enable them to make hard budget decisions and to later defend those decisions with their voters. The information should include the long-term socio-economic effects of alternatives to the proposed budget items. Multi year budgets showing the long term financial effect of a project is an absolute must. During the study the need for proper communication also came to the fore. There is a lack of effective and open communication between council, the media and the ratepayers. More resources should be channelled to this important aspect of local government. It is necessary to inform and school the broad public on the responsibilities and operations of local government. Properly informed, the public will over the longer term show more understanding when projects are deferred or tax levels are raised.